Franchising is big business that keeps getting bigger, and there’s lots of money to be made — that is if you know where to look. The trick is to hitch your wagon to the fastest, strongest horse!
That means you have to screen out less than ideal businesses to find the right one with the sure-fire system.
Most of the information you would need is available either in the Franchise Disclosure Document (FDD), which all franchisors are required by federal law to disclose to potential franchisees, or through the interviews you should do as part of your due diligence.
So whatever you do, don’t sign any contracts based on superficial knowledge. Your research should go deep and should include advice from the experts.
What Everyone Should Know About a Franchise before Signing a Contract
Litigation History
If a franchisor has been the object of numerous lawsuits from disgruntled franchisees, walk the other way. This history is easily discovered in Item 3 of the FDD. A simple Google search might dredge up more detail, but remember, just because you read it online doesn’t make it true!
Track Record
Ideally, the franchise you choose should have plenty of franchisees operating successfully for a sufficient period of time. They are the folks, after all, who will be perfecting the franchise system and helping you succeed with your business. Look at the list of outlets, Item 20, in the FDD. Where are they and when were they established?
All Upfront fees
These would include an initial franchise fee, and costs to start up the operation, marketing fees, the cost to buy any equipment you need, build out a location, hire employees, and sign a lease. You also want to factor in the cost to consult an attorney and an accountant. If the numbers appear unaffordable, you shouldn’t sign because one of the biggest causes of business failure is undercapitalization. All costs are listed in the FDD, Items 5-7.
A Franchisee’s Obligations
If you don’t agree with all the expectations for how you must operate, this business is not for you. Find this information in Item 9.
Renewal and Termination Procedures
The franchisor is also required to detail how a franchise can be terminated or ownership transferred or renewed. Know these details upfront, because there will come a time when you want to sell either to retire with your hard-earned wealth or for a tidy profit. Advice from a franchise attorney is well worth the cost.
Why franchisees have left the system
With the list of outlets in the FDD (Item 20) you also get contacts for franchisees who have left the system in the last three years. Call them and find out why. If you learn about a pattern of neglect you might want to back away. Just remember, sometimes the fault lies with the franchisee, and don’t just take one person’s word.
What current franchisees say about the franchisor
Interview current franchisees. What works for them? Are they making money? Are they happy with the business? Would they make the purchase again?
While your research may take some time, and expert advice may add some expense, the payoff is in choosing a great franchise that gives you the life and the living you always wished for and that works for you in the long run.
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Contact Dan Citrenbaum to help you create the career you’ve always wanted. As a franchise coach, Dan brings years of experience helping people select and buy a franchise or existing business. You can reach Dan at dcitrenbaum@gmail.com or at (484) 278-4589.
© Dan Citrenbaum 2015
This guest post is by Dan Citrenbaum, a Franchise Coach and Entrepreneurial Consultant who helps people achieve their dreams as small business owners. Find Dan at www.EnterpreneurOption.com.